Federal Reserve

[FerrisBueller86]

Liberal and conservative economists alike mostly agree that the Federal Reserve is a good thing.  Because of what I read in my economic textbooks, I have always believed that.

But as a longtime stock market bear who has read commentaries from other bears, I'm questioning the wisdom of having a Federal Reserve.  The idea behind having the central bank is to smooth out the business cycle.  When the economy is too slow, the central bank encourages more economic activity by expanding the money supply with lower interest rates.  When the economy is running at full capacity and causing inflation to heat up, the central bank dampens the price pressure by contracting the money supply with higher interest rates.  The independence of the Federal Reserve is supposed to ensure that it does the right thing and does not give in to pressure from the White House and Congress to prime the pump 24/7/365 to ensure reelection.

Alan Greenspan's relentless expansion of the money supply has made me question the wisdom of the Federal Reserve.  He helped fuel the dot-com/NASDAQ bubble.  He creates a moral hazard that encourages rampant speculation with well-publicized bailouts like the post-1987 crash bailout and the Long Term Capital Management bailout of 1998.  Dropping interest rates to less than the inflation rate in the last few years (a negative real interest rate) has led to the housing bubble, which has been bad for social welfare, as housing prices have increased much faster than wages as the speculators keep trying to out-bid each other for the next house.

The bubble has to burst sooner or later, and this will end badly.

All this makes me wonder if we'd be better off in the long run without a central bank controlling the economy.  The central bank sets our short-term interest rates.  As I discussed in another thread, price controls are a bad thing, because they cause distortions in the economy and lead to gluts (in the case of price supports) or shortages (in the case of price limits).  Rent control only exacerbated the housing shortage in New York City.  Price limits led to the long gas lines of the 1970s.  Price supports have only exacerbated the crop gluts.

If there were no Federal Reserve manipulating interest rates and the money supply, big credit bubbles and resulting busts wouldn't happen.  If too many people clamor for credit at once, interest rates would rise, and the trend would self-correct.

[Richard]

Liberal and conservative economists alike mostly agree that the Federal Reserve is a good thing.

HUH??  What are you smoking?

The rest of your post is good though.  The Federal Reserve should be abolished, and the control should be given to Congress (again).  $100 1776 dollars were worth $113 in 1916, and now it is worth over $1,700 due to inflation caused by the Federal Reserve.  It is a corrupt organization.

[True Federalist (진정한 연방 주의자)]

If there were no Federal Reserve manipulating interest rates and the money supply, big credit bubbles and resulting busts wouldn't happen.

HUH??  What are you smoking?

Panic of 1857
Panic of 1873
Panic of 1884
Panic of 1893
Panic of 1907

Five major boom-bust cycles that happened during the period between the Second Bank of yje United Sttaes and the Federal Reserve System.  (One could also add in the Panic of 1837, but to be fair that one could be blamed more on the inability of the financial system to properly adjust to not having a central bank, so I won't.)

The boom-bust cycle has little to do with monetary policy.  By and large, the Federal Reserve has doen it job well, but it is hardly a panacea.

[David S]

If you want a different perspective on the Federal reserve you might want to read "The Creature from Jekyl Island" by G. Edward Griffin.

A few points;
Banks loan out about ten times more money than they have. The Fed sets the ratio of loans to reserves. Then the banks charge interest on the money they never had but loaned out anyway.

The Fed also creates money out of nothing and loans it to the government, although in that case the excess interest is returned to the treasury.

The process of creating money out of nothing causes inflation and is the primary reason why the purchasing power of the dollar is only 5% of what it was before the FED was born.

The process of banks loaning out money they don't have causes boom cycles, but when people decide to withdraw their money its not there. If enough people try to withdraw their money the bank folds and a bust cycle ensues. Today banks cannot fail in quite the same way, since the Fed can create dollars in unlimited quantities, to back up the deposits. However if the bank does manage to go broke as the S and L's did twenty years ago, guess who gets stuck with the bill? It isn't the bankers who made money loaning out non-existent funds. No the bankers have that figured out pretty good. The FDIC or FSLIC come to the rescue and cover the deposits with taxpayer funds. So you and I get stuck with the bill. As I recall the S&L bailout cost the taxpayers about $500 billion.

So the banks make interest on money they don't have and if they screw up and go broke it doesn't matter because the taxpayer rather than the banker gets stuck. Sweet deal for the bankers.

[Erc]

If you want a different perspective on the Federal reserve you might want to read "The Creature from Jekyl Island" by G. Edward Griffin.

A few points;
Banks loan out about ten times more money than they have. The Fed sets the ratio of loans to reserves. Then the banks charge interest on the money they never had but loaned out anyway.

The Fed also creates money out of nothing and loans it to the government, although in that case the excess interest is returned to the treasury.

The process of creating money out of nothing causes inflation and is the primary reason why the purchasing power of the dollar is only 5% of what it was before the FED was born.

The process of banks loaning out money they don't have causes boom cycles, but when people decide to withdraw their money its not there. If enough people try to withdraw their money the bank folds and a bust cycle ensues. Today banks cannot fail in quite the same way, since the Fed can create dollars in unlimited quantities, to back up the deposits. However if the bank does manage to go broke as the S and L's did twenty years ago, guess who gets stuck with the bill? It isn't the bankers who made money loaning out non-existent funds. No the bankers have that figured out pretty good. The FDIC or FSLIC come to the rescue and cover the deposits with taxpayer funds. So you and I get stuck with the bill. As I recall the S&L bailout cost the taxpayers about $500 billion.

So the banks make interest on money they don't have and if they screw up and go broke it doesn't matter because the taxpayer rather than the banker gets stuck. Sweet deal for the bankers.

That's a problem with the FDIC (a creation of Roosevelt), not the Fed.

[opebo]

I am not against the Federal Reserve, but it has become politicized.  Much of Greenspan's excesses of the last 6 or 7 years were intended to get Bush elected and re-elected.

[David S]

If you want a different perspective on the Federal reserve you might want to read "The Creature from Jekyl Island" by G. Edward Griffin.

A few points;
Banks loan out about ten times more money than they have. The Fed sets the ratio of loans to reserves. Then the banks charge interest on the money they never had but loaned out anyway.

The Fed also creates money out of nothing and loans it to the government, although in that case the excess interest is returned to the treasury.

The process of creating money out of nothing causes inflation and is the primary reason why the purchasing power of the dollar is only 5% of what it was before the FED was born.

The process of banks loaning out money they don't have causes boom cycles, but when people decide to withdraw their money its not there. If enough people try to withdraw their money the bank folds and a bust cycle ensues. Today banks cannot fail in quite the same way, since the Fed can create dollars in unlimited quantities, to back up the deposits. However if the bank does manage to go broke as the S and L's did twenty years ago, guess who gets stuck with the bill? It isn't the bankers who made money loaning out non-existent funds. No the bankers have that figured out pretty good. The FDIC or FSLIC come to the rescue and cover the deposits with taxpayer funds. So you and I get stuck with the bill. As I recall the S&L bailout cost the taxpayers about $500 billion.

So the banks make interest on money they don't have and if they screw up and go broke it doesn't matter because the taxpayer rather than the banker gets stuck. Sweet deal for the bankers.

That's a problem with the FDIC (a creation of Roosevelt), not the Fed.

The people on the FED are wealthy and powerful. They wrote the Federal Reserve Act and convinced congress to pass it. Whose idea do you think it was to create FDIC?